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Economists react to December inflation

Canada's economic landscape faces new challenges as the annual headline inflation rate for December soared to 3.4 per cent, causing a stir among economists and prompting speculation about the timing of potential rate cuts. While the headline figure aligned with expectations, core inflation measures experienced an unexpected rise, leaving experts divided on the future trajectory of the economy.

Sal Guatieri, senior economist at BMO Capital Markets, expressed disappointment at the higher-than-anticipated inflation pressure revealed in Statistics Canada's monthly Consumer Price Index (CPI) report. He emphasized that the core trim and median measures, closely monitored by the Bank of Canada, unexpectedly increased instead of following the anticipated decline.

The core trim and median inflation measures, designed to filter out components with more volatile price fluctuations, collectively surged by 3.65 per cent last month. This exceeded economists' predictions of a 3.35 per cent pace, reinforcing concerns about inflationary pressures.

Economists find themselves split on the appropriate timing for potential rate cuts, given the unexpected inflationary trends. Randall Bartlett, senior director of Canadian economics with Desjardins Group, acknowledged the absence of positive news in the inflation report. He analyzed the underlying factors contributing to the acceleration in headline inflation, pointing out that various measures of underlying inflation have moved considerably higher.

Despite the unfavorable data, Bartlett maintained his outlook, anticipating a rate cut in April. He suggested that inflation is likely to resume a downward trend, justifying the Bank of Canada's move to lower rates in the spring.

Tu Nguyen, economist with RSM Canada, advocated for more immediate action, proposing that the Bank of Canada should start cutting interest rates as early as April. Nguyen argued that inflation is primarily driven by shelter costs, specifically high rent growth and rising mortgage interest payments, which are influenced by the housing shortage and monetary policy.

Rising rent prices, up 7.7 per cent year-over-year in December, contribute to inflation, keeping potential homebuyers in the rental market. The structural issue of a housing shortage, coupled with high mortgage interest payments, poses challenges for monetary policy to address.

Addressing wage growth and lagging productivity, Bartlett highlighted the disparity between the two, identifying it as a significant source of inflationary pressure. He stressed the need for increased investment in digital technologies and manufacturing equipment to boost Canada's overall productivity.

Bartlett also noted that while Canada's population is expected to outpace hiring, leading to an increase in the unemployment rate, it could help alleviate wage pressures and ease inflation.

In light of the mixed signals from Tuesday's CPI report, economists are closely watching for the Bank of Canada's next move. The central bank's interest rate decision on January 24 will be a crucial indicator of its strategy to address the current economic challenges and inflationary pressures facing Canada.